Darren Adam Heitner, Esq. is the Founder of HEITNER LEGAL, Founder/CEO of Dynasty Dealings, LLC, Professor of Sport Agency Management at Indiana University Bloomington, Co-Founder of Collegiate Sports Advisors (CSA) and Founder/Chief Editor of Sports Agent Blog, a leading niche industry publication. He is an attorney licensed to practice on the state and federal level, and focuses on sports, entertainment, and intellectual property litigation and transactional work.
Darren is the author of How to Play the Game: What Every Sports Attorney Needs to Know (published by the American Bar Association), Contributing Writer of An Athlete’s Guide to Agents, 5th Edition, and has authored many sports, entertainment and intellectual property-related Law Journal articles.
Darren has a Bachelors of Arts from the University of Florida and a Juris Doctor (J.D.) degree from the same institution.

Athlete Stock Company Signs 49ers Vernon Davis, But Buyer Beware

Houston Texans running back Arian Foster was the first and now San Francisco 49ers tight end Vernon Davis has joined as well. The two aforementioned NFL players (along with their respectively owned holding companies) have entered into brand contracts with an athlete stock corporation named Fantex, Inc. Foster is set to receive $10 million in exchange for Fantex’s receipt of a right to 20% of the running back’s future on-and-off field income. More recently Davis agreed to $4 million in return for a 10% interest in the tight end’s brand income (as defined in the brand contract). The fine print is important — the payments by Fantex to the athletes are contingent upon Fantex obtaining financing to pay said purchase prices.

San Francisco 49ers tight end Vernon Davis has become the second player to sign a contract with athlete stock trading platform Fantex. (Image credit: Getty Images via @daylife)

Reservations for those interested in purchasing Fantex Series Arian Foster Convertible Tracking Stock (it is not actually stock in Arian Foster, but instead a security that is intended to track and reflect the separate economic performance of the brand contract that Fantex has entered into with Arian Foster) will be opening next week. The Form S-1 registration statement has been filed (and now amended) with the U.S. Securities and Exchange Commission (SEC) and Fantex has applied for permission to trade its securities in all 50 U.S. states.

Is investing in Arian Foster’s and/or Vernon Davis’ future earning potential a savvy idea? Generally investors are curious as to the “going concern” of the company and its ability to pay its current and future obligations whether through the capacity to raise additional capital or generate profit from its business activities.

It is first important to recognize that the reason Fantex, Inc. exists is because the Fantex Series Arian Foster Convertible Tracking Stock, a future Vernon Davis-related stock and any other athlete-based stock (Fantex is actively pursuing other athletes in a variety of sports) do not meet the requirements of national exchanges. Thus, Fantex created its marketplace — one that it believes will be very attractive to sports fans.

Fantex CEO Buck French acknowledged the risks in a conversation with FORBES. ”Liquidity is a risk associated with a security, but we are creating an exchange that we hope that people will come to and trade on,” said French. ”If you look at the Arian Foster prospectus, there are risks associated, but we think that the discount rates that we applied to his potential future cash flow streams make it an easy investment to understand. The competitive advantage is that if you’re interested in investing in the brands of professional athletes, there is really no other place that I know of that you can actually do that.”

The discounted rates that French alluded to are likely to be criticized by many who recognize the short NFL life-span of running backs, Foster’s injury history (including his recent struggles with staying healthy) and the decline of wealth accumulated by professional athletes as they age. There is another important question to be asked — who controls the Arian Foster brand and determines what opportunities are best for him?

“We absolutely will provide advice and perspective on who we believe are endorsements or partners that align with the [athlete's] brand,” explained French. ”It’s advice that he does not have to take. He is in charge of his own brand . . . we are just at the table. Arian is represented by William Morris Endeavor; they will decide what they want to do and whether they want to take our advice or not. The ultimate decision rests with the athlete.”

The explanation provided by French makes legal sense, but how will potential investors react to that revelation? Will individuals (even if they are hardcore sports fans) feel comfortable with investing their money in a tracking stock when neither they nor the operators of the stock have any real power to influence the direction of the brand?

Finally, what about the viability of Fantex, the company overseeing the entire process that has captured the attention of the entire sporting world? French used Foster’s contemplated offering as an example to demonstrate how he plans to survive and reap profits for Fantex. ”If and when we successfully raise the capital to close and the SEC declares the S-1 effective, then from February 28 of this past year on a going-forward basis, Arian [Foster] owes us 20% of his brand income as he derives it based on the definition within the contract,” said French. ”95% of that brand income gets attributed to the tracking stock. 5% of the brand income goes to Fantex Platform Common Stock. Ultimately that’s how Fantex, Inc. generates its income.”

Are you ready to pony up the cash?

Darren Heitner is a Partner at Wolfe Law Miami, P.A. in Miami, Florida, Founder of Sports Agent Blog Professor of Sport Agency Management at Indiana University and author of a forthcoming book, How to Play the Game: What Every Sports Attorney Needs to Know published by the American Bar Association. Learn more about him at http://www.darrenheitner.com.

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